September 29, 2016 Raz Chorev

Bigger Spend = Quicker Growth?

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I often wondered what makes certain companies grow faster than others. What makes a company like Tesla, for example, overtake established market leaders like General motors, or the European or Japanese car makers. Those car-makers have been showing steady Year-On-Year growth, over more the 100 years, yet Tesla is catching up to them, currently being in the top 5 list of automakers by market cap. I’ve read many research documents, excellent books such as Jim Collins’ Good To Great & Built To Last, and other research based books to try and answer that question.

However, people who know me well, know how sceptic I am when it comes to statistics. I believe that if you want to prove a point, you’d be able to conduct a research to prove your point. Statistically, 83% of academics will take the high road, and protest. That’s ok. Although I just made that up, it does make sense, doesn’t it?

On a serious note, I’ve always believed that companies wanting to accelerate their growth, need to invest a lot more than companies that are happy with less aggressive growth. It kind-of make sense, but I had an urge to get some data which can prove it! In the past few years, I’ve come across dozens of companies with various growth appetite. All of them wanted to grow (that’s why they’ve engaged me!), but their appetite for rate of growth was very different:

Some were in a steady decline, and wanted just to stop the bleeding, and others were in a start-up mindset, and wanted to grow in hocky-stick growth curve. Not all companies are the same, and not every leader is as hungry as the next…

So I went out and researched (typed in a few keywords and phrases in Google), to find the number to back up my innate belief. And lo and behold – I found what I was looking for!

Hinge Marketing have conducted a comprehensive study to prove that common belief, held by many marketers… and they have found there’s a direct correlation between spending and growth rates… So far, not surprising, right? It makes sense and all… but I wanted to know, and many of my clients asked me, is whether the growth/investment diagram look like:

  • Is the more you spend, the quicker you grow?
  • Is there a point where other considerations come into play?
  • Is there a point where you spend too much, and can’t justify the investment as growth is minimal?

All very valid questions! And the answer is yes. To all questions. So let’s look at the data:

Based on the company’s research paper, the research included 3 types of companies:

Misers – lowest 20% of spending

Typical – middle 60% of spending

Big Spenders – highest 20% of spending

Based on my previous assumptions, assumptions that could pass as “common sense”, we could come to conclusion that the Big Spenders, enjoy the highest growth rate. But that would make this article unnecessary. Let’s go back to those valid questions aforementioned and understand the research findings. But before we do this, let’s expand the spending categories, and include not only pure advertising spending (what commonly known as marketing spend), but all business development costs.

Wow! That’s quite interesting, isn’t it?! This simple chart (I like simple!) demonstrates clearly that high growth companies, actually spend LESS than the average growth companies. On average, high growth companies spend 12.6% of their revenue on business development-related costs, 1.1% less than the average growth companies. That’s an interesting finding, isn’t it? It’s especially interesting, as it kind of defies my cynicism of statistically biased research.

But here’s the interesting thing. Not only the higher growth firms growing faster, while spending less, they were also more profitable!

Now that’s ridiculous! And grossly unfair! So those companies, spend less, grow faster, and make more money! What gives?

Again, due to my own experience, I had a gut feeling, or a hunch what the reason was that created that unfair advantage for the higher growth companies. And this time – I was actually right.

The advantage those higher growth companies had, was a well-defined strategy. It all starts with a deep understanding of what your core business is, and how well you stick to it. In another blog post I’ve elaborated on the need to watch out for product/service range expansion, and make sure it’s well defined and not haphazard.

Specialisation 

The research asked the participants to rate their companies from 0-10 on the level of specialisation they offered. It turns out that people working in high growth firms, rated their companies as highly specialised (9-10/10). Being everything to everybody isn’t a winning strategy, when it comes to growth rate.

Being everything to everybody isn’t a winning strategy, when it comes to growth rate.

Differentiation

Participants from high growth companies were convinced that their companies had a demonstrable differentiator, 3 times as the average growth companies’ participants.

Other strategies

As demonstrated in the table below, there isn’t one winning strategy, but a variety of different strategies which define growth rate.

Barriers to growth

It was interesting to see what participants from average and high growth companies articulated as a barrier for growth.

Recently I watched a video about accountability, which describes the level of one’s accountability as being Above the line or Below the line. Although the video was referring to people, it was interesting to see how this correlates to companies as well:

Participants from average growth companies claimed that their barriers to growthwere the Competition and the Economy. Both elements which are out of their control. On the other hand, people work at high growth companies, were clear on their barriers to growth: Finding the right people, finance and cash flow, and marketing / business development activities. All areas which can be dealt with, and the company is accountable for.

Want to be a high growth company? Here are some tips:

Strategy first!

Not just a marketing strategy, but a business strategy. Understand your clients, market, and your own offering, and match them all up. Define where you want to go, how soon and what do you need to do to get there.

Then Clients…

Do you know your clients? How well do you really know them? Make a conscious effort to understand your clients, who they are, what motivates them, and what problems they’re facing. Once you understand your clients, it will become easier to focus your messaging and marketing investments.

Then Specialisation…

Focus is key for success. The more you’re focused on the value you bring to the market, the easier it is for your market to identify you. This is particularly true for service companies, although product companies should also specialise in something: solve problem in a particular area (for example: Health, Beauty, Sport, pest control, etc.), or for a particular market (Home, office, mining, schools, etc.).

Be known for something, and stick with it. Let it be known what do you stand for, and keep repeating the message. Allow the market to “peg” you, find a fit for your products or services, and you’ll grow a lot faster, while enjoying higher profit margins at the same time.

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